An Erratic Monsoon poses Risk to Inflation

07 Sep 2022

India is experiencing an erratic monsoon season leading to disruption in sowing of crucial summer crops. Citi analysts highlight that rising pressure on cereal pressure poses a ~15-20bps upside risk to the baseline 2HFY23 CPI inflation forecast (~6.2%YY), which has baked in a fall in the inflationary momentum in 2H. They expect headline inflation in August to be likely close to 7%YY with the risk titled to the upside (10bps)

Key Highlights:

• 1. Monsoon and Crop Sowing: Crucial rice producing states like WB and UP are facing severe rainfall deficiency with rainfall slowing in another important state of Punjab as well. While there has been an improvement in rice crop sowing in August, it is still 7% below normal levels (vs. 11% deficiency in end-July). Citi analysts also observe a worsening sowing trend for pulses. Overall sowing data continues to suggest downside risk to summer (kharif) crop production.



• 2. Cereal Supply: Food Corporation of India (FCI) has reported a fall in the stock of wheat by more than 50%YY in July-2022 and is below the seasonal buffer norm set for start of the Jul-Sep quarter. Stock with FCI for rice has also fallen by 4%YY. Citi analysts believe that export restrictions on rice is unlikely to be as severe as wheat given global dependance on Indian Rice, Contribution to annual exports( ~USD10bn),Media reports suggesting ban only on a variety of broken rice and Domestic supply-demand dynamics suggesting scope for exports subject to state of FCI stocks.



• 3. Food Inflation Risk: August witnessed an increase in wheat prices (up ~21%MoM),Atta (wheat flour up ~5.6%MoM, Key pulses(double digit increase) and Rice (up~3.4% Mom). Rice has ~5% weight in the CPI basket - if rice price follows wheat’s pattern, it could disrupt the CPI food basket. Citi analysts expect an upward pressure of ~15-20bps to 2HFY23 headline inflation forecast increasing the risk of above 6% inflation print in Mar-2023 quarter.
• 4. Other upside risk to 2H Inflation: Citi analyst see an upside risk to their baseline CPI forecast for the rest of the year. This can be attributed to variation in rainfall impacting vegetable prices, Urban wage inflation pressure, Housing inflation and a renewed commodity price pressure.

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